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Pay to play infects Chicago beer market
« on: November 26, 2010, 09:57:45 PM »
http://www.chicagobusiness.com/article/20101120/ISSUE01/311209986/pay-to-play-infects-chicago-beer-market-crains-investigation-finds

The Wit Hotel in the Loop is a trendy hangout for the after-work and weekend crowd. Clubbers dressed to the nines party year-round on its 7,000-square-foot rooftop and, 27 stories below, in the State & Lake bar off the lobby.

The boutique hotel also is on the front line of Chicago's brutal—and at times illicit—battle over beer.

When the Wit opened in 2009, bar managers stocked State & Lake's 16 taps with an impressive selection of microbrews, including Stone, Anderson Valley, Two Brothers and Metropolitan, a new hometown brand.

Then, in June, most of the craft beers from smaller distributors disappeared,, replaced by 11 specialty brands carried by Chicago Beverage Systems LLC, a powerhouse distributor of Miller, Coors and other labels.

“We don't know exactly what went down, but we used to have beer there that was selling well and now we don't,” Tracy Hurst, co-owner of Metropolitan Brewing, a microbrewery in Ravenswood, said at the time.

UNDERCURRENTS IN BEER WAR

What went down at the Wit is but one example of the fierce, behind-the-scenes struggle for dominance in Chicago's $500-million-a-year beer market. The city is one of the last contested territories for the nation's two beer giants—Anheuser-Busch InBev N.V. and MillerCoors LLC, an affiliate of SABMiller PLC—which wage a proxy war through licensed distributors. The major wholesalers are movers and shakers themselves: the billionaire Reyes family; Yusef and Jonathan Jackson, sons of the Rev. Jesse Jackson; and, as of September, Warren Buffett's “favorite banker,” Byron Trott.

Independent brewers say the brand-name distributors, with deep pockets and abundant supply, often resort to pay-to-play business practices that mirror the worst of Chicago politics. Sources say the big brewers and their wholesalers keep out the independents by offering cash, new tap systems, free beer and other incentives to tavern owners and retailers in exchange for taps or shelf space for mainstream brands. Some bar owners have set up separate marketing companies to take in the cash, a monthslong Crain's investigation has found, while their taverns benefit from lower prices and “special” discounts.

There's just one problem: Federal and state laws forbid producers and distributors from offering money, loans or anything else “of value” to retailers to freeze out the competition, with such exceptions as signs or ad materials under certain dollar limits. It's also unlawful for bars to accept these gifts.

The fight between Bud and Miller helps consumers by keeping beer prices in Chicago lower than the national average. That's good news for fans of Miller Lite and Bud Light, which together soak up half of the city's beer sales. But pay-to-play also means fewer craft beers poured from Chicago bar taps—the most coveted spot in any tavern—even as their national popularity grows. Consumers drink roughly twice as much craft beer per capita in Spokane, Wash.; Charlotte, N.C., and Des Moines as in Chicago.

The competition for tap space forces many bars to heavily favor the Anheuser-Busch distributors and the craft beers they offer, or pick the MillerCoors distributors and their craft labels.

For fledgling, cash-strapped brewers, the practice thus can force a difficult choice: dig deep into their pockets and play along by giving distributors discount beer or freebies that can be passed along to bar owners—or effectively be shut out of the taps of the city's 3,374 businesses that serve alcohol. (With the exception of brewers distributing their own products, only middlemen between manufacturers and retailers can sell beer, wine and liquor at wholesale in Chicago and the rest of Illinois, a law that dates to the repeal of Prohibition in 1933.)

“Brewers call Chicago a whores' market,” says Deb Carey, co-owner of New Glarus Brewing Co., of New Glarus, Wis., which sold draft beer in Chicago for two years in the mid-1990s. New Glarus pulled out, Ms. Carey says, because it didn't want to participate in illegal business practices such as giving away beer to get bars to carry its products.

Ms. Carey says Illinoisans constantly are urging her to sell her Spotted Cow ale here again, but she's not interested. “Everyone has a hand out and everyone wants some cash, (free) beer or a discount,” she says. “As far as I'm concerned, it's not worth the graft and hassle.”

“Small brewers can't afford to pay to play,” she adds. “I really blame the big domestic brewers for creating this mess.”

Jerry Glunz, general manager of Lincoln-wood-based Louis Glunz Beer Inc., says he can't afford to pay, either. Mr. Glunz, who distributes such craft beers as Dogfish Head and Three Floyds, says he has lost tap handles at bars because a competitor was willing to pay $10,000 per handle for only six months.

“It really frustrates our sales people because we don't have the money to throw around,” Mr. Glunz says. “You can't get involved with it because once you pay for a tap, the next guy will just outbid you, and then it becomes a vicious bidding war.”

Brewers sometimes get directly involved. A former senior brewery executive says beer producers have paid for bar equipment and repairs, passing payments through their distributors as marketing reimbursement. “I've seen the checks cut,” he says. “Eight or nine times, I saw the parent company stroke the money.”

A spokesman for MillerCoors says the brewer takes “pride in doing our business the right way.” He adds: “Pay-to-play practices are illegal and are not accepted practices or behavior by MillerCoors or its distribution network. All MillerCoors employees are trained through ethics training annually. These practices are called out as illegal.”

In a statement, Anheuser-Busch says it “always respects and abides by the laws in all jurisdictions where it does business and believes its wholesalers do so as well.”

‘COMES WITH THE TERRITORY'

James Doney, president of Chicago Beverage, a subsidiary of family-owned Reyes Holdings LLC, says his salesforce has never offered cash or free beer to bars. “We train our people hard,” he says. “We pay them good money, and they make money by picking up new business. But we draw the line at anything illegal.”

Taverns and restaurants often “ask for things, but we always follow the laws,” Mr. Doney says. “We spend a lot of money on training and attorneys, and we make all of our people sign ethics guidelines.”

Mr. Doney says smaller distributors complain about Chicago Beverage and Budweiser wholesalers River North Sales & Service LLC and City Beverage-Illinois simply because they're big. “It comes with the territory,” he says. “It's just like how everyone doesn't like the Yankees.”

The extent of pay-to-play in the Chicago beer market is hard to quantify. Over five months, Crain's talked with dozens of people in the business, including brewers, distributors, bar owners and managers, as well as former employees of bars and bar marketing companies. But they often balked at talking on the record, fearing it would jeopardize their jobs or professional relationships.

As one bar owner who had worked for a tavern marketing company puts it: “If somebody did (talk), they'd have a death wish. They'd never work in a bar again.”

Entrepreneurs in Action: Half Acre Beer

Chicago is a beer drinker's town - but not much of a beer maker's town. Until a few years ago the city was home to just one commercial brewery. Gabriel Magliaro is out to change that with Half Acre Beer, his North Side startup.

Privately, they told remarkably similar stories of taverns charging brewers and distributors thousands of dollars for tap lines, ringing up phantom parties and other events as “marketing” revenue and accepting new tap systems or other physical improvements at no charge.

In retailing, paying stores to carry goods and underwriting marketing costs are common practices. Food and consumer-products makers also can favor one outlet over another. But because beer is regulated and taxed, the rules are different. Bars can get volume discounts on products they purchase, for example, but they cannot receive discounts as an inducement to carry a brand of beer, says Richard Haymaker, chief legal counsel for the Illinois Liquor Control Commission, the state agency charged with enforcing the law that prohibits cash payments or freebies to taverns.

INDEPENDENTS' PLAY

Jason Ebel blames bar owners as much as big distributors for the graft. He founded Two Brothers Brewing Co. in Warrenville with his brother and father in 1997. Two years later, when they couldn't persuade a major distributor to carry their beer in Chicago, they set up one of their own, Windy City Distribution Co.

Windy City has become a favorite of independent brewers and supplied Ms. Hurst's Metropolitan beer and many of the other small-batch beers initially offered at State & Lake.

“When we started Windy City, it was a means to an end, because there wasn't a distributor in Chicago that wanted to touch craft beer,” Mr. Ebel says. “We went around to bars and they said, ‘Great beer. How many free cases can you give me?' We just had to walk out of those accounts, set a price and stick to it. And nobody asks us that anymore.”

STORY CONTINUES BELOW
The do-it-yourself Ebel brothers

    Jim and Jason Ebel are in a privileged position in the Chicago beer market.

The brothers, along with their father, own Two Brothers Brewing Co. From the same Warrenville address, they run a craft beer wholesaler, Windy City Distribution Co., owned by their wives.

    The dual businesses give them an edge over other independent brewers, who have to woo a big wholesaler to distribute their products to bars and retailers. In fact, Windy City has become the middleman of choice for many small breweries, including Anderson Valley, Metropolitan and Stone.

    Generally, federal and state laws forbid brewers from owning distribution companies. But Illinois and 33 other states exempt small brewers who deliver their own output within their home state.

    The brothers — Jim is a lawyer who manages the business and Jason focuses on brewing — ran into a problem when they started distributing beer for others. At first, they owned both companies, but the Illinois Liquor Control Commission balked at extending their license until the microbrewery created the separate firm.

    Now the brothers face another regulatory hurdle. When Anheuser-Busch InBev N.V. tried to buy City Beverage-Illinois, one of the brewer's biggest local distributors, the state blocked the deal. A U.S. District Court judge subsequently banned all brewers from self-distributing but delayed enforcement until March. If lawmakers don't rewrite the state's beer laws by then, Two Brothers and fellow craft brewers will have to find other distributors.
Kate MacArthur

Metropolitan's Ms. Hurst was among the few to speak out. When her beer got the boot at the Wit, she posted the news on Metropolitan's Facebook page, charging that Chicago Beverage had “arranged” a contract with the Wit to carry the company's beers and was “offering $200 incentives to their (sales) reps to steal tap handles.”

Ms. Hurst says she based her post on what a Windy City sales rep told her. It drew comments from friends and colleagues who spread the news on Twitter and on their personal blogs. One Metropolitan employee, writing on her own blog, called for boycotting Chicago Beverage Systems' beers and the State & Lake bar. “Keep going to these places,” one Facebook post read. “Order a non-beer and tell their manager you'll not buy beer as long as they play the CBS game.”

Mr. Doney denies the allegations and says the tap change at State & Lake was just business. “This happens all the time in Chicago, and small brewers lose accounts when someone else offers a deal,” he says. “We had been targeting that account for a year-and-a-half. We spent a lot of time making presentations on how they could sell more beer, and I think they are happy with how much beer they are selling now.”

Eric Adelman, director of purchasing at State & Lake, likewise says there was nothing underhanded about the deal, though he won't reveal the details. He says he switched beers because Chicago Beverage offered better terms. Mr. Adelman is always open to considering new beers, he adds: “We won't get rid of Chicago Beverage, but we might be able to throw in a few more craft beers.”

In fact, Mr. Adelman says, Chicago Beverage initially bid for all 16 taps, but he told them he needed some “wiggle room” for beers from others. In August, Metropolitan's Krankshaft Kolsch beer reappeared on tap at State & Lake.

Ms. Hurst has no plans to file a formal complaint with the Illinois Liquor Control Commission. “We have an independent spirit,” she says. “We're not the type to go running to the authorities.”

Complaints are rare, and few result in agency action. In the 10 years through last May, the liquor commission had issued 406 administrative fines for “of value” violations—state-wide. Rock Island led the way with 52 violations, followed by 24 in Galesburg and 23 in Moline. Chicago's total for the decade? Nine.

In one Chicago case, Snickers Bar in River North was fined $500 in 2009 for accepting a free keg refrigerator from River North Sales & Service, according to commission documents. In another case, the documents show, Fireside Restaurant & Lounge in Edgewater paid a $500 fine for accepting a free kayak from a distributor to use in a drawing in which patrons had to purchase a beer to get a raffle ticket.

“Most retailers and distributors know they aren't supposed to do this,” Mr. Haymaker says. “It's possible that Chicago retailers are sophisticated at hiding it or distributors aren't filing complaints against each other, or it may not be happening at all. Whatever the case, we are committed to investigating any complaint on the subject.”

Beer distributors also are policed by the U.S. Treasury Department's Alcohol and Tobacco Tax and Trade Bureau, which investigates alleged violations of the Federal Alcohol Administration Act. The law also prohibits brewers and distributors from owning any retail outlets that sell their products. In the city, a third watchdog, the Chicago Liquor Commission, grants liquor licenses to retailers, enforces municipal codes and investigates underage drinking and public-nuisance complaints.

LITTLE ENFORCEMENT

John Hall, president of Chicago-based Goose Island Brewing Co., thinks authorities have higher priorities than investigating pay-to-play in Chicago bars. “When you think about all the issues in this state and city, I don't think people want to spend more money enforcing this when we don't have enough money even for education,” he says.

Even if more brewers complained, the state commission lacks the muscle to enforce the law, Crain's has found. The agency employs 24 investigators to monitor more than 28,000 retail locations selling alcohol in Illinois.

Illinois is one of 32 states enforcing a three-tiered regulatory system, which requires major breweries, wineries and distilleries to sell their products through wholesalers, not directly to retailers. At least a dozen distributors are licensed to operate in Chicago. But just three control two-thirds of the market: Chicago Beverage, part of the Reyes family's $12-billion-a-year holdings; River North, co-owned by Yusef and Jonathan Jackson since 1998, and City Beverage-Illinois, recently acquired by Mr. Trott, a former Goldman Sachs Group Inc. investment banker, through his Chicago-based BDT Capital LLC. (Anheuser-Busch retains a 30% stake.)

City Beverage has “employed very strict ethics policies which our employees are subject to and embrace; this includes compliance with all regulatory and legal requirements,” says Kathleen McCann, senior vice-president of Detroit-based Soave Enterprises Inc., which sold its majority interest in the wholesaler to BDT in September. “We work very hard to compete fairly without any violations of the liquor laws in place. We win on our products and service.” Mr. Trott did not respond to interview requests.

River North's Yusef Jackson declined to be interviewed for this article.

River North and City Beverage provide Budweiser and its many related brands, including Bud Light, Michelob and Busch, as well as Labatt's, Corona and Rolling Rock. Chicago Beverage distributes the Miller and Coors brands, including Miller Lite, along with Heineken, Corona and others.

While Budweiser is the king of beers across the U.S., with about a 50% marketshare, Miller reigns in Chicago. MillerCoors and its many brands command half of the Chicago beer market. Anheuser-Busch brands come in a distant second, with about a quarter, followed by various imports and independents, such as Old Style.

The competition keeps prices low; the average price for a case of beer in the Chicago metro area is $17.10, less than the $19.13 nationwide average, according to New York-based market trackers Nielsen Co. Average craft beer prices are $30.51 per case nationally and $27.85 in Chicago.

As craft beers have picked up—sales shot up 16% last year, according to Nielsen—distributors have added independent labels to their trucks. Chicago Beverage now carries Sam Adams, New Belgium and local favorite Half-Acre, among other craft beers. River North and City Beverage distribute popular Goose Island in its many varieties, as well as Fuller, Brown Ale and others. Nonetheless, the upstarts claim only 5.3% of the Chicago market vs. 6.3% nationally and even more in many other big cities.

Pay-to-play takes many forms. The most common approach, says a former sales manager for a national brewer who asked not to be named, is for wholesalers to give away beer or pay cash for tap lines.

Some bars and restaurants tally “of value” incentives from distributors as revenue from other sources, former bar owners and managers tell Crain's. A bar, for example, might “swipe” a distributor's credit card for food or a Super Bowl party without ever providing those services. Brewers and distributors might provide retailers with menus, T-shirts or other promotional items. These practices are also prohibited under Illinois law.

TAP CHARGES

A craft brewer tells Crain's that Rockit Bar & Grill, with locations near Wrigley Field and in River North, wanted to charge him $3,000 to put his beer on tap.

Arturo Gomez, president of Chicago-based Rockit Ranch Productions, owner of Rockit, Underground and Sunda bars, insists his company has never engaged in pay-to-play practices, including accepting money for taps. Mr. Gomez says he focuses on offering the beers his customers want. “We always look at everything in terms of the consumer and make sure we have as well-rounded a menu as humanly possible.”

Mr. Gomez says his bars maintain good relationships with MillerCoors and Budweiser dealers alike. The distributors don't offer any special deals other than the usual promotions offered to all bars, he says, adding that accounts that do well usually receive more promotions, but nothing illegal. Five of the six beers on tap at Rockit come from River North.

Budweiser and other River North products also rule the taps at North Side bars McGee's, Wrightwood Tap, Durkin's, Duffy's and Redmond's, all managed by Bar 1 Events. A former Bar 1 employee says the company accepts payments from distributors for sports packages, contests and other events in return for its loyalty. The president of Bar 1 is Thomas Piazza, who owns the bars with his brother, Philip.

The Piazza brothers and Bar 1's other directors did not respond to questions after Crain's submitted them by e-mail at their request.

Similarly, a former employee of Four Corners Tavern Group tells Crain's that Chicago Beverage agreed to pay Four Corners at least $30,000 to get tap space in its bars and to keep Budweiser out for a year. Four Corners operates the Brownstone, West End, Schoolyard, Gaslight, Sidebar, Kirkwood, Benchmark and Crossing bars on Chicago's North and Near West sides. Four Corners is an Illinois corporation owned by Matthew Menna, and Mr. Menna is listed as an officer of several of the bars, state records show.

Chicago Beverage-distributed beers, including Miller Lite, Coors and various craft brands, dominate the spouts at the Four Corners bars; only one of the bars offers Bud Light on draft.

In addition to the cash, the bars received numerous free kegs throughout the year for fictitious marketing events, the former employee says, adding that he personally “swiped” Chicago Beverage's credit card on several occasions for the payments.

Tim Ryll, one of four directors at Four Corners, rejects those assertions. “Chicago Beverage has brands that are incredibly popular,” he says. “Every vendor knows we're going to do what's best for our customers. You say the word ‘free' anywhere in Chicago and you're going to have the liquor commission on you.”

Mr. Doney of Chicago Beverage calls Four Taverns a “very good customer” and says the allegations are false.

BUY FIVE, GET ONE

Sometimes the major brewers get directly involved. A former employee at Bar Louie, a national chain with three locations in Chicago, tells Crain's that both MillerCoors and Anheuser-Busch paid $1,000 per tap handle annually and threw in a free keg for every five sold. The former employee, who asked not to be named, says Bar Louie ran the payments through a third-party marketing company set up by its owners.

Until June, Bar Louie was owned by local restaurateurs Roger Greenfield and Theodore Kasemir through their Restaurant Development Group. The company filed for bankruptcy protection in 2008. Court documents describe an affiliated company, Restaurant Marketing Inc., as “a corporation owned equally by Greenfield and Kasemir's wives, Jennifer Greenfield and Lisa Kasemir née Wolfe, but allegedly controlled by Greenfield and Kasemir.”

The Bar Louie chain was sold to Sun Capital Partners Inc., a Boca Raton, Fla.-based private-equity firm that owns the Smokey Bones Bar & Fire Grill chain.

Numerous calls to Messrs. Greenfield and Kasemir's company were not returned. The brewers deny making payments to Bar Louie.

Mike Roper, who owns Michael & Louise's Hopleaf Bar in Andersonville, says large brewers and bars have a strong incentive to keep pay-to-play alive. The bars get free beer and lower costs while the brewers gain access to lucrative outlets. Though Hopleaf is one of the city's best-known gastropubs, featuring 34 regional microbrews and specialty beers from Belgium on draft, a bar in Wrigleyville will sell more draft beer on a Chicago Cubs game day than Hopleaf will sell in a month, he says.

“Craft brewers have to compete in a marketplace that is not completely fair, and it's like athletes having to compete against someone on steroids,” says Mr. Roper, who has been working in Chicago bars since 1982 and says he hasn't engaged in pay-to-play. “Being with Bud or Miller gives craft beers a better chance to get into popular bars or chain stores.” The larger distributors have more clout, but they also can drag craft breweries into the pay-to-play world, he adds.

Greg Koch, CEO of Escondido, Calif.-based Stone Brewing Co., says Chicago is thoroughly corrupt. Stone was selling its beers in 34 states and in such big cities as New York, Los Angeles, Houston, Boston and Denver before deciding to give Chicago a try in April.

“We waited for several years to go to Chicago because we knew if we didn't want to pay to play, we would have to wait until our reputation was strong enough to avoid it,” says Mr. Koch, whose beer has become a favorite among local craft beer aficionados.

After selling in Chicago for six months, he says the city deserves its reputation, but adds that he'll stay in the market. “Chicago is becoming an absolutely great beer town,” he says. “We're doing very well.” But Mr. Koch adds that bars and liquor stores ask for money, free beer or illegal discounts “all of the time.”

“This type of stuff goes on almost every other place,” he says, “but not to the degree that it happens in Chicago. It seems to be part of the city's DNA.”
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Offline emerge

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Re: Pay to play infects Chicago beer market
« Reply #1 on: November 26, 2010, 10:03:31 PM »
tl;dr <_<

Offline Homerbag

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Re: Pay to play infects Chicago beer market
« Reply #2 on: November 27, 2010, 12:11:32 AM »
Sounds like we need a bad motherf*cker with a screwdriver to regulate this bitch

Offline Lum

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Re: Pay to play infects Chicago beer market
« Reply #3 on: November 27, 2010, 07:59:08 AM »
Sounds like we need a bad motherf*cker with a screwdriver to regulate this bitch

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Offline urbanhack

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Re: Pay to play infects Chicago beer market
« Reply #4 on: November 29, 2010, 01:55:36 PM »
not surprising...
i'm not good at putting this stuff in words but i can't see myself with anyone else except maybe urbanhack.